Zillow Inc (NASDAQ:Z) has been catching a lot of momentum as the online real estate website continues to collect fees from its real estate listing services. The company provides housing statistics to its users referred to as Zestimates that helps buyers to identify potential arbitrage opportunities between the value of the house and the market value. This helps buyers to determine if they’re buying the property at a discount. Zillow Inc (NASDAQ:Z) also goes a step further by providing information on monthly mortgage payments based on interest rates and down payments. Zillow Inc (NASDAQ:Z) is a calculator, estimator, and listing agent at the same time.
Economic environment
Things are turning around in the property market which should keep investors up-beat on the growth of the company going forward.
Source: Ycharts
The housing market has been able to make a reasonable turn around with home builders gaining confidence to build houses and apartment units. The increase in demand for houses is what is giving Zillow Inc (NASDAQ:Z) additional upside going forward. It also helps to know that the Federal Reserve has no plans of raising the discount interest rate prior to 2015, implying cheap credit for the foreseeable future, which will increase the demand for housing and housing-related services going forward.
The company grew unique visitors by 47% year-over-year in the first quarter of 2013. The company followed that positive user statistic with strong growth in premier agent subscribers, which grew by 83% year-over-year. The growth in its professional subscribers is the primary reason for the company’s recent revenue surprise. Analysts on a consensus basis were hoping for $37.4 million in revenue. The company’s recent earnings announcement topped that with revenue growing year-over-year by 71%. The company reported revenue of $39 million for the first quarter of 2013.
Investors are generally willing to buy internet-services companies at a higher multiple to earnings as investors are willing to sacrifice short-term loss of profitability with the future expectation of cost-cutting. Most online services at some point maximize profitability, which is why investors buy heavily into the rapid growth, no income phase of a dot com company, than wait for the company to fully optimize the business in order to generate a profit. This happens on a regular basis with Google Inc (NASDAQ: GOOG) and eBay Inc (NASDAQ:EBAY) being strong examples.
Key take-away: It could be a potential buy-out target
Zillow Inc (NASDAQ:Z) operates a narrowly-defined niche and has been able to build a marketplace around its products and services. The company has been able to establish a strong and respectable brand identity even throughout a period of economic uncertainty surrounding housing. The company has been able to avoid a buy-out by larger web-based properties for now.
Source: Ycharts
The companies that could potentially buy Zillow Inc (NASDAQ:Z) are as follows: Google Inc (NASDAQ: GOOG), Yahoo! Inc. (NASDAQ:YHOO), and Facebook Inc (NASDAQ:FB). The two companies likely to benefit the most and most likely to do it would be Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ: GOOG).
Source: CNN Money
According to the chart above, In 2012 companies paid a 25% premium over the stock’s previous closing price. This gives us an average estimate of what Zillow could be worth in the event of a buy-out as the stock is already priced at an astonishing 305 earnings multiple. The current market capitalization is $2 billion with a 25% premium attached to the valuation; the company would be bought at a valuation exceeding $2.5 billion.
First I am going to start with why I don’t think Yahoo! will buy Zillow. Yahoo! already has a real estate website similar to Zillow. Yahoo! calls this service Yahoo! Homes. Not to mention Yahoo! has $4.1 billion in cash and short-term assets. Assuming it would take $2.5 to $3 billion to buy-out the stock, Yahoo! would end up using more than half of its short-term assets to buy-out a company that will not generate any profit in the immediate future.
Google Inc (NASDAQ: GOOG) on the other hand, may consider a buy-out of Zillow. First, the problem with having cash is that it erodes value quickly. Having too much money also opens up criticism from shareholders to initiate a share buy-back program, along with dividends. Google Inc (NASDAQ: GOOG) has the most cash among the three companies I compared at $63 billion. The CEO, Larry Page in the latest earnings questions and answer was open to incremental revenue growth opportunities. Analysts on a consensus basis expect Zillow to grow earnings by 30% year-over-year over the next 5-years. Zillow has a proven business model, which should make it easier for Google Inc (NASDAQ: GOOG) to part with its cash.
Facebook Inc (NASDAQ:FB) could stand to benefit the most from buying out Zillow. Rather than using up a ton of cash on hiring armies of engineers that may have no idea as to what it is they are doing. Facebook Inc (NASDAQ:FB) could instead buy-out a company that has a proven business model and is still in its rapid growth phase. Facebook Inc (NASDAQ:FB) has $9.6 billion, giving it enough of a cash cushion to be a bidder on the stock.
Facebook Inc (NASDAQ:FB) should be in search of alternate business models that are similar to advertising, but fall under the classification of more “specialized advertising.” Perhaps Zillow and Facebook Inc (NASDAQ:FB) could be integrated together better, and be a standardized feature on Facebook.
Conclusion
Zillow is a worthy contender of being bought out. The valuation the company currently sports is in the sweet spot ($2 o $3 billion range). Investors who have the patience and are willing to stay the course should be able to outperform the market.
As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other web companies, it’s also struggling to adapt to an increasingly mobile world. Despite gaining an enviable lead with its Android operating system, the market isn’t sold. That’s why it’s more important than ever to understand each piece of Google’s sprawling empire.
The article Zillow Could Be a Potential Buyout From Google or Facebook originally appeared on Fool.com.
Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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